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Extension of the senior managers and certification regimes

Financial Regulatory Alert

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4 OCT 2017

The global financial crisis highlighted the difficulties with the culture in banks and in holding individuals to account for their failings. To help prevent the reoccurrence of these failings, the Parliamentary Commission recommended a number of measures. These included the implementation of a framework to provide clarity of responsibilities, ensure accountability and improve the competence and conduct of all levels of staff. To this end, in March 2016 the Financial Conduct Authority (FCA) introduced the Senior Managers and Certification Regime (SMCR) for Banks, with the aim that similar requirements be extended to all other financial services firms.

In July 2017, the FCA published its long-awaited proposals for the extension of the rules on the SMCR. This will extend the SMCR to almost every firm the FCA regulates, from very small firms and those with limited permissions (including sole traders and consumer credit firms) to some of the largest global financial institutions. The FCA aims to introduce SMCR rules which are flexible and proportionate to the nature of and risk posed by these firms and it is anticipated these rules will commence from 2018. The extension of the SMCR framework will require the thousands of affected financial services firms to make fundamental changes to their compliance practices in advance of its implementation.

There are three limbs to the framework:

The Senior Managers Regime (SMR) enhances the
accountability and responsibilities of a narrower and more
senior set of individuals (than those covered under the
Certification Regime), including the senior executives of
the regions/functions/businesses and non-executive directors
who chair board committees. Under the SMR, these
individuals are subject to approval by the FCA. Under the
FCA’s proposals, all FCA authorised firms should have at least
one senior manager.

We can assist firms with their assessment of the SMR,
review of existing governance arrangements and the
approval processes for Senior Managers, in addition to
ongoing support to firms’ Senior Managers on their new
obligations.

The Certification Regime requires a broader number
of employees (than those covered under the SMR) who are
Material Risk Takers (MRTs) or who perform a role within a
firm which means that it is possible for the person to cause
significant harm to the firm or its customers, to be certified
by the firm (not by the FCA), as being fit and proper to
undertake their role. This moves the onus from the regulator
to firms themselves to conduct these fitness and propriety
checks on individuals performing Certification Functions
(as well as Senior Managers and Non-Executive Directors).

We can assist firms with the implementation and
satisfaction of their new responsibilities under the
Certification Regime.

The Conduct Rules set out high-level standards of
behaviour that will apply to almost all employees who
perform financial services activities in a firm. Some Conduct
Rules apply to all employees, while others only apply to
Senior Managers. By applying the Conduct Rules to a
broad range of staff, the FCA aims to improve individual
accountability and awareness of conduct issues across firms.
Firms are required to train their staff so that they know how
the Conduct Rules apply to them. Firms must also notify the
FCA when they have taken formal disciplinary action against a
person for breaching a Conduct Rule.

We can assist firms with interpretation, integration and
application of the new Conduct Rules into their businesses.

How will the regime be extended?

The FCA is proposing under the SMCR regime that FCA solo-regulated firms (i.e. those not also regulated by the PRA) will be broken into three categories:

"Core Regime" These are baseline requirements applying to all regulated firms. All core requirements will apply to all solo-regulated firms, except for Limited Scope Firms.

"Enhanced Regime" For larger and more complex firms (<1% of those regulated by the FCA). There are additional requirements which include: (i) Responsibilities Maps; (ii) Handover Procedures; and Designated senior manager responsible for every area of the firm ("Overall Responsibility").

"Limited Scope" There is a reduced set of requirements for smaller firms, ie. those firms that currently adopt a limited application of the current Approved Persons Regime. This includes sole traders, limited permission consumer credit firms, insurance intermediaries whose principal business is not insurance mediation and internally managed Alternative Investment Funds.

What are the key action points?

Firms should take immediate steps to:

Understand the new regime

Identify whether they are an Enhanced, Core or Limited Scope Firm

Identify staff responsible for implementing the SMCR and establish a working group

Identify senior manager roles and the responsibilities to be allocated between them

How can we help you?

DLA Piper has a dedicated regulatory team with extensive experience acting for financial services and financial market participants and dealing with complex regulatory matters. We have extensive experience in advising both companies and individuals on the scope of their responsibilities under the SMCR and dealings with regulators.

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DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world.

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